Testing for Expense Preference Behaviour in UK Building Societies: the Implications for Measures of Scale and Scope Economies

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It is well established that utility maximising managers who are not owners of the firm may engage in expense preference behaviour. This article provides the first test for expense preference behaviour in UK building societies. A translog cost function is specified and a direct test for expense preference is conducted which avoids the restrictive assumptions of the intercept test which has been used to test for expense preference behaviour in a number of previous articles. The specification of a translog cost function also permits the estimation of scale and scope economies in UK building societies and this paper compares the estimates obtained when expense preference behaviour is present with previous estimates obtained under the assumption of cost minimising behaviour.